Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions.What major disadvantage of this method should the company consider before deciding to institute it?
A) This method does not make allowance for difference in the size of compared divisions.
B) Opportunities may be undertaken that will decrease the overall return on investment.
C) The minimum required rate of return may eliminate desirable opportunities from consideration.
D) Residual income does not measure how effectively the division manager controls costs.

Question

Quizplus · Accepted Answer

Residual income does not account for the size of divisions, which means larger divisions might naturally have higher residual incomes, making it difficult to compare performance across divisions of different sizes.

Delmar Corporation Is Considering the Use of Residual Income as a Measure